The budget for fiscal year 2024-25, the first of the newly-elected (with many claiming “installed”) government of the Pakistan Muslim League (Nawaz), is expected in the first or second week of June 2024. Every year before the announcement of the annual federal budget, which has become an official ritual, a plethora of tax proposals are received by the Federal Board of Revenue (FBR) from trade and professional bodies, tax bars and the industry’s representatives, all destined for their dustbins.
For the last many years, the FBR itself has been soliciting budget proposals by placing detailed guidelines on its website. However, each year, the finance bill, presented in the form of Money Bill under Article 73 of the Constitution of Islamic Republic of Pakistan proves to be a hopeless document—containing meaningless amendments in the tax codes, imposing more and more burden on the existing taxpayers, especially through cumbersome withholding of taxes, with no policy shift to promote business, facilitate existing taxpayers and bring the untaxed sectors and persons in the tax net.
Net revenues available with federal government were short by Rs. 1.18 trillion to meet a debt servicing of Rs. 5.83 trillion, meaning thereby that the entire defence spending of Rs. 1.59 trillion was met through expensive borrowed funds. It represented a fiscal fiasco—threatening economic viability and national security of the state.
This series, till the announcement of budget 2024, will present some evocative changes in our tax system that can boost business, in particular the export sector, to ensure accelerated economic growth, leading to enhanced taxes for the government to overcome fiscal deficit and overcome imbalances on external account.
During its 16-month rule from April 2022 to August 2023, the alliance government of Pakistan Democratic Movement (PDM), miserably failed to improve the situation on the fiscal front as evident from the Summary of Consolidated Federal and Provincial Fiscal Operations, 2022-23, released by the Ministry of Finance (MoF) for FY 2023. The most shocking and startling fact was that against the total federal and provincial revenues of Rs. 9.63 trillion, total expenditure was Rs. 16.15 trillion.
Net revenues available with federal government were short by Rs. 1.18 trillion to meet a debt servicing of Rs. 5.83 trillion, meaning thereby that the entire defence spending of Rs. 1.59 trillion was met through expensive borrowed funds. It represented a fiscal fiasco—threatening economic viability and national security of the state.
Taxation should serve as a catalyst for industrial expansion and economic growth. In Pakistan, the ill-directed, illogical, regressive and unfair tax regulations are causing a dampening effect on industrial and business growth.
The situation in the current fiscal year (FY 2024) is more appalling. As per provisional figures released by the MoF for the first nine months of FY 2024, the total revenues of the country, federal and provincial, amounted to Rs. 9.78 trillion while total expenditures were Rs. 13.69 trillion, registering a fiscal deficit of Rs. 3.90 trillion. Debt servicing alone was Rs. 5.517 trillion. The federal government had net revenues (tax and non-tax) of Rs. 5.313 trillion, after transferring Rs. 3.815 to the provinces. Thus, it borrowed funds of Rs. 204 billion to meet the burgeoning shortfall in debt servicing—thus the entire defence expenditure of Rs. 1.222 trillion and other expenses were met from the expensive borrowed fund.
The International Monetary Fund (IMF) has made it a point that the policy rate of State Bank of Pakistan remains at the historic high level of 22 percent so that Pakistan never comes out of the ‘debt prison’ and the caretakers were more loyal than the King to implement its agenda. The debtocracy, in which Pakistan is caught up, is not only has economic dimensions, but also serious political ramifications of slavery imposed by the late neocolonial forces.
Pakistan under these circumstances, needs a tax system that can help break the shackles of debtocracy. But the IMF and its local lackeys will never allow it—the agenda is to make the nuclear state economically toothless. Taxation in Pakistan is oppressive, lopsided and counterproductive—there is only 2% of corporatization of total business. But by heavily taxing the corporate sector vis-à-vis firms and association of persons, FBR has been encouraging undocumented sector.
Taxation should serve as a catalyst for industrial expansion and economic growth. In Pakistan, the ill-directed, illogical, regressive and unfair tax regulations are causing a dampening effect on industrial and business growth. The sole stress on meeting revenue targets, without evaluating its impact on the economy, has been crippling our trade and industry, especially since we have started submitting completely before the dictates of the lender of the last resort and other foreign lender and donors. Had successive governments concentrated on economic growth and industrial expansion, there would have been a consequential substantial rise in taxes. It is impossible to enhance revenues with stagflation, and overtaxing an ailing economy, as has been done in Pakistan—it has in fact destroyed our tax system as well.
The priority of our economic managers have been trying to achieve revenue targets, fixed irrationally every year in utter disregard of how the economy is actually behaving or at the dictate of IMF. It appears the incumbent Federal Finance Minister for Finance & Revenue, yet another banking sector wizard, Muhammad Aurangzeb, who earned BS and MBA degrees from The Wharton School at the University of Pennsylvania, has yet to comprehend this main problem of our tax system.
There cannot be two opinions about the need for a complete reorientation of our economic priorities. As a nation, we must concentrate on increasing our productivity, efficiency and economic growth, which alone can ensure more revenues for the State.
Muhammad Aurangzeb needs to be reminded that by fixing revenue targets in isolation and without making necessary efforts to improve productivity, efficiency, environment, work ethics, energy cost, and economic growth, Pakistan has been forced into a quandary, where it can neither afford to give any tax relief package to the trade and industry due to growing fiscal deficit, nor can it achieve a satisfactory level of economic growth due to retrogressive tax measures. This is a vicious circle which has ensnared our policymakers. They will have to find ways and means to untangle this mess to make Pakistan an economically viable and secure state, which can attract local and foreign investors. In a country where there is no security of life or property, notwithstanding the availability of a host of tax benefits and other incentives, investors would never deploy capital if the status quo persists.
The FBR, the apex administrative revenue authority, has been single-handedly destroying Pakistan’s trade and industry by resorting to discretionary powers through the use of Statutory Regulator Orders (SROs), withholding undisputed refunds payable to the taxpayers, making excessive tax demands and recovering the same by freezing accounts even before ordered by Tax Tribunals, resorting to all kinds of highhandedness to meet its budgetary targets. Such actions of the tax machinery have proved to be detrimental for business and industry and resultantly, the FBR not only has failed to tap the real revenue potential, but has remained unsuccessful in meeting even many times revised targets for the last many years. Besides, there has been a perpetual increase in our fiscal deficit and debt burden.
There cannot be two opinions about the need for a complete reorientation of our economic priorities. As a nation, we must concentrate on increasing our productivity, efficiency and economic growth, which alone can ensure more revenues for the State. The main cause of our pathetic economic situation is the existence of inefficient, corrupt, repressive and criminal governments and outdated institutions, which do not care much for the welfare of the common people.
Successive governments, civil and military alike, have been extending concessions, immunities and amnesties to dishonest non-compliant people engaged in trade, business and industry.
Successive governments’ onerous tax and regulatory policies on the dictates of the foreign masters have pushed millions of people below the poverty line. We will have to move quickly and decisively to reverse this trend by restoring Pakistan’s undeniable geostrategic and competitive business position in the region. There is an urgent need to take the necessary and tough decisions to make Pakistan a respectable place to live, work and invest.
For achieving the above goals, instead of proposing cosmetic changes in the Income Tax Ordinance 2001, Sales Tax Act 1990, Federal Excise Act, 2005 or the Customs Act, 1969, Muhammad Aurangzeb and his team, if there is any, should concentrate on key areas where paradigm shifts are needed in structural and operation level to ensure not only more tax revenue for the state but also business growth, social equity and fairness so that honest taxpayers are not disillusioned. Successive governments, civil and military alike, have been extending concessions, immunities and amnesties to dishonest non-compliant people engaged in trade, business and industry.
A Taxpayers’ Bill Of Rights
The government, before imposing any new obligations on the taxpayers, must restore the confidence of taxpayers by immediately promulgating a Taxpayers’ Bill of Rights, as was done by a number of countries including USA and UK in the 1980s. The provisions of the Bill must safeguard and strengthen the rights of taxpayers, ensure equality of treatment, guarantee the privacy and confidentiality of their declarations, provide the right to assistance by State in tax matters, guarantee the unfettered right of appeal through an independent appellate system and encourage alternate fast-track administrative dispute resolution systems.
Assignment Of Tax
The assignment of a tax means transfer of taxation power from a higher level to a lower level government. Taxation power includes the following: right to levy tax, collect tax, and appropriate proceeds from the tax. Thus, there can be three interpretations of tax assignment. Firstly, higher-level government may levy and collect a tax, but handover the entire proceeds to lower-level governments. Secondly, the higher-level government may levy a tax, but allow the lower level governments to collect it and retain fully the proceeds therefrom.
Finally, the higher-level government may transfer a tax to lower level governments, a situation which defines assignment of a tax in its strictest sense. However, from this perspective all provincial governments are violating the command of Article 140A of the Constitution by not devolving political, administrative and fiscal powers to elected local governments.
There is an urgent need in Pakistan to reconsider the equitable distribution of fiscal sovereignty and taxing powers among federation, provinces and local governments.
In Pakistan, the exact opposite has happened. The levy of presumptive taxation by the federal government and no powers to local bodies to raise funds for providing education and health at grass root level have denied the fundamental rights of the people. The provinces enjoy exclusive rights under the Constitution to levy taxes on services within their respective physical boundaries. The federation blatantly encroaches upon their undisputed right by levying tax on services on presumptive and minimum basis—this is in substance indirect taxation—under various sections of the Income Tax Ordinance, 2001. Such taxes are not taxes on income, which the federal government is empowered to levy under item 47, Part I of the Federal List, Fourth Schedule to the Constitution.
Generally, the purpose of tax assignment is to augment the resources of lower-level governments. The assignment of tax may be conditional. Thus, it may be obligatory on the part of a lower-level government to levy the tax assigned to it. Not only this, the lower-level government may not have power to alter the basic structure of the assigned tax. It may enjoy flexibility in fixing the tax rates within a minimum and maximum range prescribed by the higher-level government.
There is an urgent need in Pakistan to reconsider the equitable distribution of fiscal sovereignty and taxing powers among federation, provinces and local governments. True provincial autonomy can only be guaranteed if the assignment of tax principle is followed in letter and spirit. The working of local governments, as per constitutional command Article 140A is essential to dislodge District Management. Provincial autonomy measures in the wake of the 18th Amendment have failed to fulfil this command. Let the provinces have an exclusive right over their resources and finances, and they must transfer taxes to local governments so that grassroots democracy and funds for public services can be utilized and guaranteed.